Schwab adds a human side to its robo-advice services

Nick Kirsch, a certified financial planner with Charles Schwab�s Intelligent Advisory service, chats with a client from his office in Indianapolis.

Nick Kirsch, a certified financial planner with Charles Schwab�s...

The robo-advice wars heated up again last week, as T. Rowe Price began marketing its first digital-investment offering, and Charles Schwab released Intelligent Advisory, a human-assisted version of its original robo service called Intelligent Portfolios.

Robo advice is evolving rapidly, but the basic product is a low-cost, semi-customized portfolio meant for “mass affluent” investors with $100,000 to $1 million in assets. Clients typically go online, answer a handful of questions about their age, assets, income and risk tolerance and get a highly diversified portfolio of regular or exchange-traded mutual funds.

Thanks to technology, this self-driving portfolio is automatically rebalanced to maintain the client’s desired mix of stocks, bonds and other asset classes. Some robos offer automatic tax-loss harvesting for taxable accounts, which involves selling losing positions to generate losses that can be used against taxable gains.

Tech-oriented startups such as Redwood City’s Wealthfront and New York’s Betterment pioneered the concept. Soon after, large mutual fund companies crashed the party. Some critics say they are using robo advice as a loss leader to distribute their own funds, which are used predominantly, sometimes exclusively, in the portfolios.

Schwab started Intelligent Portfolios two years ago. By the end of last year, it had $12.3 billion in assets, ranking second to Vanguard’s human-robo hybrid called Personal Advisor Services, which had $52 billion in assets. Vanguard’s service, and Personal Capital, based in San Carlos, offered access to a live adviser from the start. Betterment added a human option in late January; now Schwab is following suit.

Schwab Intelligent Advisory has 30 certified financial planners in Phoenix, Denver and Indianapolis who meet clients by phone or video chat. Each is a salaried employee with 11 years of experience, on average. All use the same planning software, “to drive consistency” in advice, said Tobin McDaniel, president of Schwab Wealth Investment Advisory.

Clients can talk to a planner once a year, or a little more often if needs arise. “If someone wanted to talk monthly, we would probably say this is not the right product for them,” McDaniel said.

Clients start by filling out an online questionnaire, but it is more detailed than a typical robo Q&A. It gathers information on current assets and delves into questions about retirement, college funding needs and even major purchases, such as a car.

This generates a plan and a portfolio the client can review with a human adviser. Clients can access their digital plan at any time to make adjustments and see how they are progressing toward their financial goals, McDaniel said.

Schwab planners can answer questions such as when to take Social Security or whether to open a regular or Roth IRA. Questions about estate plans and whether to rent or buy a home “they can talk about at the highest level,” McDaniel said. Specific questions about employee stock options would probably be referred to a Schwab equity compensation expert.

Clients can add assets they hold outside the robo account to their digital dashboard, and advisers will consider them as part of the overall plan, but “we wouldn’t give advice on the outside accounts,” McDaniel said.

Schwab’s original robo, Intelligent Portfolios, requires a minimum investment of $5,000 ($50,000 for tax-loss harvesting). There is no fee other than the expense of the underlying funds.

Intelligent Advisory requires a $25,000 minimum and has an annual advisory fee of 0.28 percent of assets, with a quarterly maximum of $900. On a $100,000 portfolio, that’s $280 per year, plus underlying fund expenses.

Traditional investment advisers typically charge their smallest clients an annual fee of around 1 percent of assets under management.

Both Schwab services assemble portfolios from the same group of 53 exchange traded funds. About 60 percent of assets are in Schwab funds, on which Schwab earns the underlying fund fee. The annual fee on all 53 funds ranges from 0.03 to 0.65 percent of assets, but the average, weighted by total assets, is 0.16 percent, Schwab says.

Each client portfolio holds 6 to 29 percent of assets in cash; the average is around 10 percent. Schwab can also earn money on this cash because it’s held in Schwab Bank. Many robo competitors have little or no cash in their client portfolios.

Vanguard’s service requires a minimum of $50,000 and charges 0.3 percent in annual fees, plus fund expenses. The service has 450 advisers, all Vanguard employees. Most are certified financial planners or working toward that designation.

Vanguard will factor outside accounts into the plan and develop an asset allocation around them. Any cash brought into the account is invested in Vanguard index funds, with a weighted average expense ratio of 0.1 percent, Farrell said. There is no limit on how often a client can consult an adviser, she added.

Michael Kitces, an independent investment adviser in Columbia, Md., said that what Vanguard and now Schwab are doing is not new and should not be labeled “robo.”

“Having (certified financial planners) that implement standardized model portfolios for clients using technology to automate the process isn’t unique or a ‘robo’ phenomenon,” he said in email. Independent advisers have been doing this for more than 10 years.

“What made the (original) robos unique was the lack of an advisor altogether,” Kitces said. “Except now one robo after another is realizing that doesn’t work very well, and thus they’re adding humans.”

T. Rowe Price’s new offering, Active Plus Portfolios, is more of a pure robo. The minimum investment is $50,000 and there is no fee other than underlying fund fees. Portfolios will have up to 14 actively managed T. Rowe Price funds with annual expenses ranging from 0.61 to 0.82 percent.

It is available only for individual retirement accounts, although “we have plans to launch a taxable version,” said Tom Kazmierczak, the firm’s head of advisory services. Clients can talk to customer service agents, but there are no financial planners available.

Kitces says independent advisers are underestimating the competitive threat posed by Vanguard, Schwab and other giant companies. In his blog, Nerd’s Eye View, he says they can “compete aggressively on price” and “utilize their massive marketing budgets and already-nationally-recognized brands to rapidly scale their marketing and drive growth even faster.”

Schwab, which has a large business providing services to independent advisers, “has not heard a lot from them on the new product,” McDaniel said. “It’s not their market.”

But it’s not really clear who the market will be. Two or three years ago, everyone thought only Millennials would want robo advice, McDaniel said. But Intelligent Portfolios’ clients are split about evenly among Millennials, GenXers and Baby Boomers. “Half are over 50,” he said.